Neetu Vinayek, Tax & Regulator, KPMG and Manish Baghla, Tax & Regulator, KPMG The significant growth of India’s economy over the past decade has led to increase in domestic energy consumption.
A strong growth in automobiles sector and increase in industrial activity has led to a sustained increase in oil
consumption. Oil & Gas constitutes around 45 per cent of primary energy commercial mix. Energy security remains a
challenge for India as India is significantly import dependent to meet its oil & gas requirement. The article details
the scope of Hydrocarbon Service Providers in Indian Oil and Gas Industry.

Government of India (GoI) has the initiated process of developing road map of
centrally planning for next five year, i.e., 2012-13 to 2017-18 as a part of 12th
Five-Year Plan (FYP) and has outlined approach towards 12th FYP. The approach
paper has acknowledged that one of the major challenges is emerging from
rapid growth in the energy needs since these requirements have to be met in an
environment where domestic energy prices are constrained and world energy prices
are high and likely to rise further.

For the gross domestic product (GDP) to grow at 9 per cent, commercial energy supplies will
have to grow at a rate between 6.5 and 7 per cent per year. Since India’s domestic energy
supplies are limited, dependence upon imports will increase. Import dependence in the
case of petroleum has always been high and is projected to be 80 per cent in the 12th FYP.

The domestic oil supply has largely been constant despite the strong demand
growth due to decreasing production from the oilfields (which are ageing) and no
additions to oil resources due to lack of a major oil discovery. India has had a historic
dependence on imports for meeting its energy requirements. The prospectivity of
Indian sedimentary basins, a large unexploited resource base, scope for infusion
of technology across the value chain, expanding pipeline infrastructure, upcoming
City gas distribution networks, availability of skilled manpower, well established
independent judiciary and a stable democratic government are the key attractive
features for investment in Oil and Gas sector in India.

The liberalised policy environment through policies in the nineties and the New
Exploration Licensing Policy (NELP) of Government of India has been instrumental
in bringing about incremental growth in oil and gas production. NELP has created
a conducive level playing field for all companies in the sector. 100 per cent Foreign
Direct Investment (FDI) has been permitted in exploration and production of oil
and gas with an objective to rapidly increase the extent of area explored from the present 65 per cent to 100 per cent by the year 2015. With this in view, India has
held 9 bid rounds. An investment of USD 16.5 billion has been made in exploration
and production activities. The process of award of 9th bid round recently concluded
future. More than two dozen foreign companies are working in Exploration &
Production (E&P) sector which include global majors.

The investor-friendly policies of India government have been able to attract
significant investments in the petroleum sector. In the last one year, two major
investment decisions made by major company’s viz. BP and Vedanta in blocks held
by RIL and Cairn respectively have re-established faith in the hydrocarbon potential
in India. While RIL-BP consortium has stated that its investments in exploration
and marketing would be up to USD 20 billion, Vedanta’s acquisition costs are likely
to be about USD 8 billion excluding future investments.

It is imperative that an increased investment in E&P activity will require development
of new infrastructure and modification of existing ageing infrastructure will be
essential for increasing the domestic oil supply.

Oil and gas exploration policies under NELP were designed to achieve rapid
expansion of domestic production with the involvement of private investors.
So far 235 blocks have been awarded. However, the results achieved are not
sufficient to meet growing requirements. There has been some increase in crude
oil production and a significant expansion of domestic gas output. However
domestic production of both oil and gas needs to be significantly improved.
ONGC’s performance in increasing production, despite the allocation of a large
number of blocks, has been disappointing. The international response to the
recent NELP offers has been poor. It is necessary to re-examine whether the
current policy provides a sufficiently attractive framework for policy which can
attract investors in this area. There is need for a stable long-term regime of fiscal
incentives which is comparable to what exists elsewhere. The issue of pricing
of natural gas and its linkage with international prices also need to be clarified
if investors are to be attracted to this sector.

Recognising the need for comprehensive review of Upstream Licensing Policy,
GoI has constituted a committee under the chairmanship of Dr C Rangarajan,
Chairman, Prime Minister’s Economic Advisory Council, to review the existing
Production Sharing Contract (PSC). The review would be in respect to current
profit sharing mechanism with the Pre-Tax Investment Multiple and exploring
various contract models. The committee will also look into a suitable mechanism
for managing the contract implementation and governmental mechanisms
to monitor and audit the Government’s share of profit petroleum. It will also
structure the guidelines for determining the formula for the price of domestically
produced gas and for monitoring actual price fixation.

It is pertinent to note that, non-conventional gas resources, particularly shale
gas and also coal bed methane (CBM), have dramatically changed the supply
scenario in the US. Similar developments are taking place elsewhere. A major
thrust needs to be given to the identification of shale gas resources in India and
the determination of the feasibility of exploiting them, which depends on several
technical factors. Expansion of CBM should also receive priority attention. An
effort to map available Shale gas resources is currently underway. Further, GoI
has recently released ‘Draft Policy for exploration and exploitation of Shale Oil
and Gas in India’ and has invited comments from all stakeholders.

All the above efforts are towards increasing E&P activities in India which will
result in increased requirements of exploratory drilling, 2D, 3D seismic survey,
reprocessing of existing data and other surveys such as Gravity-Magnetic, Magneto
Telluric, Transient Electro-Magnetic and Geochemical analysis etc. There will be
potential for other E&P services as well viz:

• Other oil and gas field services including excavating slush pits and cellars,
grading and building of foundations at well locations, well surveying, running,
cutting, and pulling casings tubes, and rods, cementing wells, shooting wells,
perforating well casings, acidising and chemically treating wells, cleaning out,
bailing, and swabbing wells, Well testing and completion services.

E&P service providers had played key role in enabling success for E&P operators
worldwide. Since the late nineties, the balance in technology development and
intellectual property has clearly shifted towards service providers. E&P companies
leverage on latest technology and specialist services of oilfield service providers to
reduce underground risks thereby improving chances of success in E&P operations.

In addition to the basic upstream services market potential there is scope for huge
upsides in case of any hydrocarbon discoveries as a result of added appraisal and
development activities as had been witnessed in past during development of
KG-D6 discovery.

Over the next five years the average annual E&P activity growth in India under the
NELP regime is expected to grow significantly in geophysical surveys, drilling and
related activities. Further, as per 12th FYP, plan outlay expenditure by ONGC & Oil is
estimated to be over USD 36 billion. This quantum jump in E&P activities across the
country will increase the demand for E&P equipment and services such as drilling
rigs, seismic vessels, cementing services, electro-logging services, and completion
and testing services. Recent discoveries made in the offshore basins will lead to
additional requirement of infrastructure and services such as offshore platforms,
sub-sea pipelines, completion equipment and services and work-over rigs.